Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Bill Geary - EVP and General Counsel

Alan McKim - Chairman and CEO

Jim Rutledge - EVP and CFO

Analysts

Rich Wesolowski - Sidoti & Co.

Mark Grzymski - RBC Capital Markets

Ted Kundtz - Needham & Company

Al Kaschalk - Wedbush Morgan

Arnie Ursaner - CJS Securities

Vito Menza - Sandler Capital

Clean Harbors Inc. (CLHB) Q3 2007 Earnings Call November 7, 2007 9:00 AM ET

Operator

Good day, everyone, and welcome to the Clean Harbors' Third Quarter 2007 Conference Call. Today's call is being recorded. There will be an opportunity for questions after the prepared remarks. (Operator Instructions).

At this time for opening remarks and introductions, I would like to turn the call to Mr. Bill Geary, Executive Vice President and General Counsel of Clean Harbors. Please go ahead, sir.

Bill Geary

Thank you, operator, and good morning everyone. Thank you for joining us today. On the call with me today are Chairman and Chief Executive Officer, Alan S. McKim and Executive Vice President and Chief Financial Officer, Jim Rutledge.

Before we get started, I would like to remind everyone that matters we are discussing this morning and the information contained in the press release issued by the company today, announcing our third quarter 2007 financial results that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements, including predictions, estimates, expectations, and other forward-looking statements generally identifiable by the use of the words believes, hopes, expects, anticipates, plans to, estimates, projects, or similar expressions are subject to risks and uncertainties that could cause actual results to differ materially.

Accordingly, participants in today's call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of this date, November 7, 2007.

Information on the potential factors and detailed risks that could affect the company's actual results of operations is included in the company's filings with the SEC, including, but not limited to, our Form 10-K for the year ended December 31, 2006, which was filed with the SEC on March 16 and our subsequent 10-Qs.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in our third quarter press release or this morning's conference call other than through the filings that will be made with the SEC concerning this reporting period.

In addition, I would like to remind you that today's discussion will include references to the acronym EBITDA, which is earnings before interest, taxes, depreciation and amortization. EBITDA is a non-GAAP financial measure and is intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of the company's performance.

A reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure is available in Clean Harbors' third quarter news release. A copy of this release can be found on our website, www.cleanharbors.com. A copy has also been furnished as an 8-K with the Securities and Exchange Commission.

And now, I would like to turn the call over to Mr. Alan McKim for our quarterly review. Alan?

Alan McKim

Thanks, Bill, and good morning, everyone. Because I know that many of our employees listen to our quarterly conference call, I would like to start our call today by congratulating the entire company for an outstanding third quarter.

Our team's combination of hard work, industry expertise and exceptional customer service translated into another quarter of record growth for Clean Harbors.

Quarterly revenues came in at an all-time high of $245.5 million, which is up 15% over Q3 of last year. Our revenue for the third quarter of the year demonstrates the strength of our business model and the diversity of our business.

We generated solid results across our operations with strong contributions, primarily from our Technical Services business segment this quarter.

Now let's discuss some of the growth drivers for Q3.

Tech Service delivered strong year-over-year growth in Q3 as the overall demand environment for our disposal facilities remain healthy.

Overall utilization in our incinerators came in at approximately 87% for the third quarter, despite scheduled maintenance that was performed at a number of our facilities. U.S. incinerators ran at a high capacity, achieving 95% utilization, and as most of you know running at such high levels is optimal for both revenue and profits as that enables us to improve the mix in materials we're incinerating in our margins.

Strong incineration levels at our U.S. facilities were somewhat offset by a decline in Canada. Similar to our second quarter, utilization in Canada continued to be negatively affected by lower incineration rates at one of our facilities, which continues to experience lower throughput, while processing above-average quantities of highly corrosive materials that result in a much slower feed rate. As a result of these two factors, utilization in our Canadian incinerators was 70% for the quarter.

Landfill volumes increased steadily in the quarter, up by 16% over last year, and on a sequential basis, landfill volumes were up 15% over Q2. We continue to see a considerable pipeline of opportunities for our landfills. We are continuing to strengthen our logistics capabilities to be more competitive in this area.

Moving on to Site Services; our core Site Service business grew by approximately $5 million in the quarter, driven by notable growth in industrial cleaning and maintenance projects, remediation and environmental construction services from our petrochemical specialty chemical and refinery clients.

This growth nearly offset the absence of any substantial emergency response revenue and what is frequently a busier season for us, due to hurricane and other weather-related incidents. In fact, in Q3 '06, we recorded approximately $8 million in emergency response work.

The Clean Harbors brand continues to grow on a national level on our Site Service business, and our Site Service business has been a consistent top performer in recent quarters. As we have mentioned on prior calls, opening new offices is a fundamental component of our growth strategy, in addition to the field services and clean up work they produce. More locations afford us the opportunity to cross sell to our Tech Service accounts and generate more volumes for our disposal facilities.

This quarter was important for Site Services in terms of expansion as well. As expected, the Romic acquisition enabled us to increase our presence in certain under penetrated markets on the West Coast. In Q3, we opened three new branches, one of which was a former Romic location in Oregon. Year-to-date we have opened seven new branches, already surpassing our annual goal of opening five to six offices in 2007.

As we move to the cost side of our business, let me take a minute to welcome an important new addition to our team. This quarter we added a new Vice President of Procurement, and hired Jane Judd to fill our role. Jane has extensive experience in procurement, and oversaw all purchases, ranging from components, to materials, to third party services, at several billion dollar corporations. We are certain that her expertise will help Clean Harbors further reduce cost, stream line business processes, and enable the transformation of procurement from a center for cost reduction to one of strategic sourcing.

We continue to keep a watchful eye on our costs, but are still facing increased expenses and pricing pressures for many goods and services we purchased, as well as rising labor, heath care insurance cost. Despite these additional costs, we generated record EBITDA of $38.4 million this quarter, up approximately 8.5% over the same period in 2006. This translates in to an EBITDA margin of 15.6% this quarter.

Now let me take a minute to discuss our EBITDA growth. If we take a deeper look, back to the third quarter of '06, we will see that last year's third quarter included an $8.4 million non-cash benefit, related to changes in estimated environmental liabilities. For a two apples-to-apples comparison, if we strip that $8.4 million out of last year’s EBITDA, our year-over-year EBITDA growth in Q3 is approximately 40%, which is more than twice our revenue growth in the quarter.

We are extremely proud of achieving that level of true EBITDA growth, which clearly demonstrates leverage in our business.

Before I turn it over to Jim for the financial review, I wanted to share with you some of our strategic initiatives we are pursuing over the next to 12 months to 18 months, that should help us better manage and capture the growth that we are seeing in the end markets we serve.

First, we are planning to expand the throughput capacity at a number of our commercial hazardous waste incineration facilities. In total we plan to add 50,000 tons of capacity to our network. Through a number of permit changes and engineering enhancements step we have identified, we expect to increase our total annual incineration capacity, which is approximately 500,000 tons by about 10% by the end of 2008 to mid-2009.

This increase will provide us with the capacity we need to handle the growth that we are experiencing in our markets, and address clients who are planning to shut down there captive incinerators or outsource certain waste streams. The capital cost necessary to add this capacity is approximately $15 million to $20 million and would be funded through operational cash flow.

The second major initiative is the construction of a new solvent recovery plant. This new facility is the result of demands we see from our customers looking for expanded recycling capabilities. In a sense the new plant is also an ancillary benefit of our Teris acquisition. It will be located at the El Dorado, Arkansas site we acquired. And we expect that construction will commence in early 2008, and be completed by year's end.

These initiatives simultaneously broadens Clean Harbors’ service portfolio and establishes a presence for us in solvent recycling markets. As the costs of solvents continue to rise, corporations are increasingly turning to recycling expensive solvents for reuse. We believe this initiative will enable Clean Harbors to offer our customers a broader range of choices for addressing the solvents waste streams.

Our El Dorado facility is an ideal location for this new plant, because of its established infrastructure, experienced work force and central location in the United States. We estimate the capital cost for this new solvent recovery plant will be approximately $5 million. This also will be funded through our own cash flow.

We expect that both of these strategic capital initiatives should deliver a rapid return on our invested capital.

Overall, we head into the final quarter of 2007 with a solid pipeline of business and strong momentum. As you can tell, we are confident about our prospects of our company for 2007 and beyond; we are very excited about what the future holds for Clean Harbors.

So, with that I will turn the call over to Jim Rutledge, so he can walk you through the Q3 financials, and provide our financial outlook for Q4 and full year 2007. Jim?

Jim Rutledge

Thank you, Alan and good morning everyone. As you likely saw in this morning's press release Clean Harbors has achieved another record quarter in Q3 generating revenue of $245.5 million. This is an increase of 15% from the $213.9 million we recorded in the year-ago quarter.

As Alan outlined in his comments, we benefited during the quarter from solid operating excellence in both our Tech and Site Service businesses, as well as some incremental revenue from our Romic acquisition.

Gross profit for the quarter grew to $76.5 million, translating in to a gross margin of 31.1%. This is even more impressive when compared with the 29.1% in the same quarter last year, during which we benefited from approximately $8 million in higher margin emergency response project work, in contrast to this quarter our emergency response contribution was about $2 million in small scale projects.

Selling, general and administrative expenses were $38.1 million or 15.5% of revenues in Q3 2007. This compares with $26.9 million or 12.6% of revenue in Q3 2006, which includes an $8.4 million benefit related to the environmental change in estimates.

Excluding this environmental credit or benefit, SG&A last year would have been $35.1 million or 16.4% of revenues in Q3 2006. Accretion of environmental liabilities was $2.7 million in the quarter compared to $2.6 million in Q3 of 2006.

Depreciation and amortization expense was $9.8 million in Q3 2007 compared with last year's figure of $11.1 million. In Q3 of 2006, depreciation expense included $2.5 million related to the write-down of the company's Plaquemine, Louisiana facility.

Q3 '07 operating income was $25.9 million, up 19% from $21.8 million in the third quarter of 2006. As Alan mentioned, we exceeded our EBITDA guidance during the quarter with Q3 '07 EBITDA coming in at $38.4 million or 15.6% of revenue, which exceeded last year's third quarter EBITDA of $35.4 million.

But this year-over-year improvement is actually greater than it appears if you consider the $8.4 million benefit in last year's third quarter related to changes environmental liabilities. Clearly, our EBITDA growth continues to far outpace our revenue growth, which demonstrates the true leverage within our business model.

Interest expense, net of interest income in Q3 was $3 million, down slightly from the $3.3 million in the comparable quarter of '06.

Our provision for income taxes was $10 million this quarter compared to a credit of $2.6 million in Q3 '06. Last year's third quarter tax provision included a $7.4 million tax benefit associated with the reversal of a valuation allowance on our deferred tax assets.

Our effective tax rate was 44% during the third quarter of this year compared to 26% last year, excluding the effect of this tax benefit in last year's figures. The remaining year-over-year increase in our effective tax rate is due to recognizing the full impact of U.S. Federal taxes without NOLs this year, as well as the effect of implementing FIN 48, Accounting for Uncertainty in Income Taxes earlier in 2007.

Net income available to common shareholders for Q3 was $12.9 million or $0.63 per diluted share based on $20.7 million average common shares outstanding. Net income for Q3 '06 was $20.9 million or $1.02 per diluted share based on $20.6 million outstanding shares.

As a reminder, last year's income benefited from the two significant adjustments mentioned, specifically the environmental credit of $8.4 million and the $7.4 million credit in our tax provision related to the reduction in our valuation allowance.

From a balance sheet perspective, our cash and marketable securities totaled a $103 million at the end of the quarter. This was approximately $15 million higher than our cash balance at the end of Q2. This increase was mainly generated from enhanced productivity and operations and working capital and careful management of our environmental and capital spending. This increase in cash incorporates also the effect of approximately $6 million spent in the quarter for the Romic acquisition.

Total accounts receivables stood at $207 million on September 30th, and our DSO was 76 days in the quarter. We are continuing to target lower DSOs going forward. Capital expenditures approximated $8 million for Q3 compared to nearly $10 million in Q3 of last year.

We continue to expect CapEx for 2007 to be approximately $40 million, as we upgrade our facilities and invest in several growth projects in our landfills and transportation areas, as well as continue to improve our safety and service reliability.

During the third quarter, accounts payable balances increased by $6.7 million to $83.4 million, and deferred revenue was marginally lower at $30.1 million on September 30th 2007.

We are continuing to benefit from carefully managing our environmental liabilities. At September 30th, our balance of environmental liabilities stood at $180.1 million, an increase of approximately $6.7 million since the beginning of the year, but that includes a $3 million of foreign exchange effect, associated with the strengthening of the Canadian dollar. Managing these liabilities and reducing our exposure in this area remains a key focus for us.

Environmental spending during the quarter was $1.5 million compared to $1.8 million in Q3 of 2006.

As a result of our third quarter performance and the growth drivers in our markets we are raising our annual revenue guidance. We now expect an annual revenue growth of 12% to 13%, compared with our previous guidance of 8% to 9%, and annual EBITDA growth in-line with our initial projections of 12% to 13%.

For Q4 that translates into revenue in the range of $240 million to $245 million, and EBITDA in the range of $38 million to $39 million.

In closing, please let me echo Alan’s congratulations to the entire Clean Harbors team for these excellent results.

With that, operator would you please open the call for questions?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions). Our first question will come from Rich Wesolowski with Sidoti.

Rich Wesolowski - Sidoti & Co.

Hey. Good morning, how are you guys?

Alan McKim

Good morning, Rich.

Rich Wesolowski - Sidoti & Co.

Jim could you just clarify the guidance, I guess I am having a tough time. If you look at 12% EBITDA growth from 2006 of $120 million, you get towards $134 million plus, and there's about $2 million to $3 million gap between, what that implies and what's implied by the $38 million to $39 million?

Jim Rutledge

No, I think Rich if you take it, it was a $119.9 million.

Rich Wesolowski - Sidoti & Co.

Right.

Jim Rutledge

Last year in 2006, so that's a little lower than what you have said. And then if you take our actual results for nine months and add the quarter guidance on the EBITDA, the low end and the high end, you come up with 11.6% rounded to 12%, and then you come up with almost 12.5%. So, we are right in that range of 12% to 13%. So, that's pretty much how it is calculated, is that what you come up with?

Rich Wesolowski - Sidoti & Co.

You know what, there is $2.2 million in the environmental liability in the first half is that included?

Jim Rutledge

I am sorry the $2.2 million environmental liability, yes, but also the $119.9 that you have for last year.

Rich Wesolowski - Sidoti & Co.

Includes those gains as well.

Jim Rutledge

Yes, it includes $9.6 million of the environmental credit so.

Rich Wesolowski - Sidoti & Co.

Okay.

Jim Rutledge

So, clearly we built on top of that.

Rich Wesolowski - Sidoti & Co.

Perfect, the incremental EBITDA margin in the 4Q guidance is about 60% versus what is a pretty strong run rate that I consider is about 30% that you posted in third quarter. Why would there be such a big jump there?

Jim Rutledge

Yeah, I think we were looking actually even in the third quarter, if you take the environmental out, I think it came out to about 35% incremental. And just looking at the strength of the business, what's coming through in the mix, we see a good potential for EBITDA on that revenue base. So, that's kind of where we see it coming out.

Rich Wesolowski - Sidoti & Co.

Can you discuss the 50,000 tones that you mentioned is 10%? What are the assumptions? I mean how of that is an estimate, it’s pretty sure you are going to come out with the assumptions that go into it, and maybe a little bit on which side specifically are you investing in?

Alan McKim

Well, we won't get in to the specifics on which sites. But basically, our engineering group and our compliance folks working with operations have been analyzing our facilities, because of the level of the utilization, and the demands that we are having in incineration. Particularly, here in the States and we have identified without expanding our overall permits of those sites, to improve production at those facilities to take more advantage of the current permits that we have.

Some of those are already in place as far as the permitting process, and we should expect by the end of this year to increase 7,000 tones at one of our plants, because we've recently got the permit and now we are investing the capital.

But these capital investments include upfront processing capabilities to further drive the mix and our feed systems to improve our feeds and in some cases include backend plant adjustments to improve our throughput, from our air pollution control systems. And so we really look at those investments as real true growth projects for us, and we think that demand is there for us to make those kind of growth investments now.

Rich Wesolowski - Sidoti & Co.

Did you mention the domestic incineration capacity utilization?

Alan McKim

Yes, we did. It was 95%.

Rich Wesolowski - Sidoti & Co.

Okay. And finally, which of your businesses, segments, end markets would you say are the most economically sensitive and how have you seen your activity in those during the last one or two quarters?

Alan McKim

We really haven't seen any impact. I think when you look at our key end markets, our refinery business is very strong, our chemical business and petrochemical business is very strong, our utility business is strong, pharmaceutical biotech is doing very well for us.

Manufacturing has been relatively flat over the last four or five years, so we are not seeing anything different there, from their outsourcing initiatives to just overall flatness in that as a percentage of revenue.

But I would say, that the industries that we are targeting and the growth areas that we are going after are for industries that are here to stay and don't seem to be as impacted by economic slowdowns.

Rich Wesolowski - Sidoti & Co.

Great, thanks a lot.

Alan McKim

Okay, thank you.

Operator

Our next question will come from Mark Grzymski with RBC Capital Markets.

Mark Grzymski - RBC Capital Markets

Good morning.

Alan McKim

Good morning.

Jim Rutledge

Good morning.

Mark Grzymski - RBC Capital Markets

Congratulations.

Alan McKim

Thank you

Mark Grzymski - RBC Capital Markets

If you could just talk about pricing, I mean you had great gross margins and volumes were very strong, so that obviously helps. But Alan, pricing is helping to offset the higher costs that you are mentioning, correct?

Alan McKim

I would like to think so. Yeah.

Mark Grzymski - RBC Capital Markets

Yeah.

Alan McKim

We are seeing higher healthcare costs and other inflationary costs as all businesses do and absolutely.

Mark Grzymski - RBC Capital Markets

Do you think that some of the pricing initiatives that you have undertaken earlier in the year, should we continue to see benefit in the forward quarters given the mix of business, etcetera?

Alan McKim

Well, I'd like to think so. We are really concerned about the price of energy, the price of crude oil is certainly impacting all of our customers and certainly impacting us, and we are working hard to keep up with that ever changing cost.

But, there is no question that we continue to focus on the pricing of our services and making sure that we are basically trying to do everything to maximize our profitability here for the risks and the investments that we are making in our business.

Mark Grzymski - RBC Capital Markets

I think it is paying off there. Alan, last year in the fourth quarter, you guys ran really hot in the incineration, and then in Q1 of this year obviously with the shutdown, you kind of got hurt. And I know you had plans to shutdowns in the third quarter, you didn't expect to have that same issue come up with the strength of business right now. Do you expect continued maintenance shutdowns in the fourth quarter, even with demand being strong?

Alan McKim

Yeah, we just have to take our plants down. It's not really a one of our choice, but whether it's refractory work that has to get done or annual air pollution control testing that needs to take place, we have to, and we will be taking down some plants in this quarter as well and certainly we will in the first quarter.

We hope that it won't be to the extent that we had in the first quarter of last year. We are hoping that we will have a couple of plants pushed out to April if we can get those completed with a turnaround this quarter.

Mark Grzymski - RBC Capital Markets

Okay.

Alan McKim

Our demand is so high, that it's tough to take a plant down because there is not a lot of room there.

Mark Grzymski - RBC Capital Markets

Understood. Just two quickies, and here first, I assume that the EBITDA guidance of 12% to 13% growth, Jim, really now just doesn't assume any event business. So, any event business in the Q4 would probably be upside of that number, correct?

Jim Rutledge

That's correct.

Mark Grzymski - RBC Capital Markets

Okay. And lastly, Jim, on the tax rate, should we continue to assume about a 39% effective tax rate?

Jim Rutledge

Yeah, it's in that 37% to 39%, but if you add the FIN 48 effect, that's what brings you up to that 43% to 44%.

Mark Grzymski - RBC Capital Markets

Okay.

Jim Rutledge

So, really if you wanted to look at what's going to come through on our financial statements, it would be more in line with that 43% to 44%, but the more the number that comes closer to our cash number because the FIN 48 is non-cash would be the 37% to 39%.

Mark Grzymski - RBC Capital Markets

Okay. 37% to 39%. Great, thanks guys, great quarter.

Jim Rutledge

Thank you.

Operator

We'll go next to Ted Kundtz with Needham & Company.

Ted Kundtz - Needham & Company

Yes, hello guys.

Alan McKim

Hi.

Ted Kundtz - Needham & Company

A couple of questions for you, could you go back to the solar energy issue, the price of oil and the effect on the captives, their incineration expenses got to be skyrocketing. And I am wondering if you can kind of give us a little bit of sense of where you see that that business going, you often talked about the captives coming off market and turning some of that incineration needs over to you guys?

Alan McKim

Alright.

Ted Kundtz - Needham & Company

Could you kind of address the economics of their business now as the price of oil just keeps skyrocketing here?

Alan McKim

Well, I think each one of them has probably their own cost model, but overall I would say that we've seen in a last few years, the captives shrinked to 78 now from where it was, just two or three years ago.

So, we have 78 captive plants. We think, there are at least five more plants, and I used five in the past. But a number of them have closed, and that's why we are down to 78. An additional number of plants should really be looking at outsourcing. When you look at their cost of energy, and their cost of operations on a per pound basis versus their outsource cost. It's considerably cheaper for them to use commercial facilities. And we've seen companies making that choice. And we think that's good for our business and it's good for our customers, quite frankly.

A lot of these captives were built in the late 80's and early 90's, when pricing was substantially higher than it is today. And so, we continue to see them make that decision. And the other point is that we can some how offset higher energy costs, if we can use other people's waste to run our plants. And we have got a team that's really focused on that. Most of our customers who have captives, can't bring another peoples waste, to offset their energy cost. And so, they are really held to whatever the cost of natural gas or diesel is to run their plants.

Ted Kundtz - Needham & Company

Alright. So, your advantage is accelerating here. So, do you get the sense that, more of these captives are going to be making that decision? You mentioned five. Do you expect five to come off market in the next year? Is that the number you threw out there?

Alan McKim

We don't necessarily control sort of to speak what they are doing. But we are assuming, that that's what going to be coming off line, based upon the increase that we are seeing, and some of the request for proposals that we see out there.

Ted Kundtz - Needham & Company

How much volume would that represent? Do you know the tonnage associated with that?

Alan McKim

Some of the material, that they are currently incinerating is probably material that does not have to go to a commercial incinerator. And so, it is safe to say, based on the five that we’ve identified, there is about 50,000 tons of material that could go to a commercial incinerator. And that’s not to say that we’re going to win it all either. But I think just overall, that’s above the volume.

Ted Kundtz - Needham & Company

Okay. And I would say, there would be upside to that number, I mean I just got to believe it, with these energy prices.

Alan McKim

Well, that’s the whole issue with the volatility in energy prices that we are all facing, whether its motor fuels to run our trucks or, the price of diesel is just sky rocketing.

Ted Kundtz - Needham & Company

Okay. Another question I had for you guys, do you have CapEx plans for next year in total? You mentioned the incremental ones.

Jim Rutledge

Ted, we are working through the budgets now, and we have gone through that. But I expect just a round, round figure, to probably be at the level we are at this year of being at about $40 million next year.

Ted Kundtz - Needham & Company

Okay.

Jim Rutledge

So, we're kind of going through that budget cycle right now. And clearly the affect of some of the CapEx that Alan talked about with respect to the additional capacity and the solvent recovery plan will have an affect on that. It could drive it higher. But I don’t have an exact figure on how much it will effect next year.

Ted Kundtz - Needham & Company

And the incremental revenue from that, well you are really talking about the completing these projects towards the end of next year. So, is that correct or some of them could be completed sooner?

Alan McKim

Yes, some will be sooner, that they will be throughout the year quite frankly. But maybe some of the capital spending in some of the bigger projects, because so much equipment has to be ordered. It won't come until the end of the year or the beginning of the following year.

Ted Kundtz - Needham & Company

Okay. So, we shouldn’t just add on that, we should add more of the access capacity coming on towards the end of the year?

Alan McKim

I would say, yes. We expect to get about 7,000 tons by the end of this year.

Ted Kundtz - Needham & Company

Right.

Alan McKim

Which, we already have.

Ted Kundtz - Needham & Company

You mentioned that.

Alan McKim

Yes. And then it will kind of come in through the end of next year and the beginning of the following year as is our plan.

Ted Kundtz - Needham & Company

Okay.

Alan McKim

We really want to accelerate that quite frankly, some of those projects had been on design phase for a couple of years, and just had never been brought up to get the capital investment that they needed. So, that we are going to accelerate some of these projects that we've already identified.

Ted Kundtz - Needham & Company

Okay. One last question, just on the landfill side. Could you give us, what is percentage of revenues that represents now and where do you see that growing? It’s a very nice quarter I guess in landfill this quarter..

Jim Rutledge

Yeah, it’s somewhere around $75 million to $80 million, that we are talking about in total landfill revenues on an annual basis?

Alan McKim

On an annual basis, that is that of course.

Ted Kundtz - Needham & Company

And how do you see that growing next year?

Alan McKim

We still have opportunities for growth there. We received our new permit in Texas at our Altair landfill. And that was about a year after our plan if would, we just received that last month, and putting forth the plan now to grow that business. We still see growth opportunities in Canada, particularly up in the Oil Sands.

We've got a brand new landfill being constructed at our existing site in Alberta. So, we would like to think that we can grow because of the Oil Sands growth going on in that market. So, I think overall if we could get our landfill revenues close to a $100 million on an annual basis that’s a good number to think about.

Ted Kundtz - Needham & Company

Sure for next year?

Alan McKim

Yeah.

Ted Kundtz - Needham & Company

Great, terrific, thanks very much.

Jim Rutledge

I would say that’s our goal to get to that $100 million, and I am not sure whether we are going to get there next year. I hate to write that down, but.

Ted Kundtz - Needham & Company

Right, maybe on a run rate type of basis you are talking more about?

Jim Rutledge

Yeah.

Ted Kundtz - Needham & Company

But by the end of next year?

Jim Rutledge

We would like to get there.

Ted Kundtz - Needham & Company

Okay.

Jim Rutledge

We are going through those very budgets right now Ted.

Ted Kundtz - Needham & Company

Okay. Terrific, thanks a lot, very nice job.

Jim Rutledge

Thanks.

Operator

Al Kaschalk with Wedbush Morgan has our next question.

Al Kaschalk - Wedbush Morgan

Good morning, Alan. Good morning, Jim.

Alan McKim

Good morning.

Jim Rutledge

Good morning.

Al Kaschalk - Wedbush Morgan

I wanted to just follow up on the capital investments that you are making and maybe just get a little bit clarification and maybe a little bit more granular. Alan, is it contracts or projects that you are seeing out there coming up for proposal or bid opportunities that you want to make the investments over the next 12 months, or is it is work that you sort of won and got in the pipeline and need to at a timely basis get this capacity headed on?

Alan McKim

I think it's the visibility that we are seeing with the volumes of our business from our repetitive waste generators, and I also think that it is being result of the anticipated increase demands with the captives continuously looking for outsourcing and for them to wind down those plans. It makes no sense for those plants in some cases to continue to run at 40% or 50% with the cost of energy these days. So, I think it's twofold, Al.

Al Kaschalk - Wedbush Morgan

But there isn't a schedule for the five that you sort of to a circle around. There isn't a set timeframe which they are planning to shutdown. There's just expectations from your side or has there been communication in the marketplace that's you have seen that these five are very probable. What I am trying to get out is the -- as you roll out into '08 and you have plant shutdowns, is that the time you are planning to do this capital investments or you'll be going along at some point and you see something is going to shutdown in the short order that you need to accelerate CapEx?

Alan McKim

No, I think all of this would be planned and required permits and major components being constructed. We typically make modifications to our plants during our normal shutdown and it may add a week shutdown too, a two-week turnaround that we might be doing at a particular plant to get this increase capacity.

And I would further say that we are looking at not only increasing the capacity, but lowering out cost, lowering our handling cost at some of these plants by automating more of our upfront processing of some of the waste that we are handling. So, we can be a lot more efficient in process more material, more efficiently.

So, I guess, I would say this is sort of like the next step in improving the operations of our nine incinerators and some of them will see a benefit of this new capital investment project and some of them won't. But, we are constantly looking at taking those plants up a notch, and that's what this capital investment is really all about.

Al Kaschalk - Wedbush Morgan

In terms of the -- previously you have communicated cost internalization efforts or sort of size of a effort to reduce cost over a cycle couple of years. I know the hiring of Jane, that's going to be one of her level of focus. But, do you have a rough idea of what dollar value still sits out there, where you think could be contributing to margin expansion over time?

Alan McKim

Yeah, I would just mention out that we typically go through as part of our budget cycle, enumerating all of the cost savings projects in all of our businesses and generally what we have been targeting is roughly about $20 million and we have been coming in $15 million to $20 million range a year. And, clearly we need to do that to offset increased costs that we have, all the things that Alan mentioned, healthcare, the cost of chemicals and consumables that are affected by fuel price etcetera.

But some of that clearly goes to margin improvement, if I had to put an estimate on how much, I would say, half probably helps our margin very roughly. But clearly, we need to keep doing this and the procurement area that you mentioned was bringing Jane on is clearly an area of focus for us, where we have got so many locations that have their own purchasing programs and so forth and we want to consolidate that and make use of national vendors and relationships with suppliers. So, we see some good opportunity there.

Al Kaschalk - Wedbush Morgan

Is that something that we should expect inside the 12 months on the procurement side specifically?

Alan McKim

I definitely think in the next 12 months, we'll see some great improvement there. Obviously, we are going after some of the low hanging fruit, but I think it goes beyond that. And what we can do in the various areas ranging from transportation to materials and supplies right through our supply chain.

Al Kaschalk - Wedbush Morgan

Okay. And then finally, sort of a two parted, but on the G&A side and the P&L, it looks like it was up a little bit more than I had expected anyhow. And with the weaker dollar, is that where we are seeing that recorded as relates to the environmental liability. Well, how does that impact if the dollar continues to sort of weaken or sort of all time low here today, obviously that going forward, if it's strengthened, do we get a benefit from that?

Jim Rutledge

Yeah, absolutely. We are kind of hoping it's the end of how much the comparison of the Canadian dollar to the U.S. dollar have. The Canadian dollar has strengthened. But clearly that has had an affect on us. And we've had, although it's less than $1 million, probably somewhere around 700 to 1,000 in that area, we saw an affect in the quarter, where we were negatively impacted by the Canadian dollar strengthening during the quarter. But again not material, but nonetheless it was a factor in there.

Al Kaschalk - Wedbush Morgan

Thank you. And strong execution.

Alan McKim

Thank you.

Operator

Our next question will come from Arnie Ursaner with CJS Securities.

Arnie Ursaner - CJS Securities

Hi. Good morning. First question I have and I did jump on your call late. Did you comment or can you speak to how the regulatory change in Ontario has impacted your Canadian business so far?

Alan McKim

At this point it hasn’t. We invested a little over $3 million to put in the pre-treatment technologies, to handle the pre-treatment of inorganic materials going into our Sarnia landfill. And so, that is operating efficiently and is supporting the needs of that plant.

By 2010, we will be in a position to handle the organic materials, which is another regulatory change that will be taking place at that site, and don’t anticipate any significant change. Pricing certainly will be changing for both of those types of waste streams, as we add more costs to pre-treat those materials. Very much like what happened in the States back in the mid 80's when the LVIs were put in effect here.

Arnie Ursaner - CJS Securities

The second question I have and again I apologize if you have covered this. But I gather your guidance does not include any contribution for event activity. And we had minimal activity in Q3. I don't think you quantify it or mentioned any impact in Q3. Given we almost never had a quarter without any, why are you being quite disconservative at this stage?

Alan McKim

Typically, when we give out guidance for the quarter, if we had an event going, and had an estimate of what we thought that was going to be, we would include that. And at this point today we don't have any major events going, and emergency response business in the third quarter plus and a couple of million dollars I think Jim.

Jim Rutledge

That's right.

Alan McKim

So, there has just been a real slowness for us and the market. There has been few events out there that we haven't participated in, but nothing anything of size until this point. Arnie, we are not anticipating in the fourth quarter in our guidance any event revenue.

Arnie Ursaner - CJS Securities

That's right.

Alan McKim

And the good part of that, too, is that with the reduction in event work our Site Service business has been replacing that with nice core of base business, so that's the trend we are seeing and continue to see.

Arnie Ursaner - CJS Securities

So, you are not quite prepared to give out '08 guidance at this point, but can you give us a feel for what sort of price increases you are targeting or hoping to achieve in '08? And remind us again of how sales force comp is driven by the ability to get cost relief or price relief?

Alan McKim

Well, we are in a budgeting stage tight now, and our budgeting process is really very detailed bottoms up budget by comp, by a line of business. And so that is an on going process that we will have done probably by the first week in December. And we'll have guidance for the Street when we do our year end call.

Regarding pricing, we see opportunities particularly in the incineration side of our business. But in other parts of some of the geographies we are into, improved on our pricing, particularly on those difficult treat streams, where we continuously are getting more costs, things like caustic [and lime] and some other chemical reagents, particularly in our landfills have been increasing quite a bit, and so we have been working hard to pass along those increasing cost to our customers to a form of price increase.

So, that is something that we are going to continue. We don't have a firm percentage to share with you today. But, clearly that's an initiative that will be ongoing next year.

Arnie Ursaner - CJS Securities

Final question for me if I can. You use a fair amount of oil in running your business, obviously you have trucks that are out there. With oil approaching a $100 a barrel, can you quantify the negative impact you have built in or expect in Q4 from the higher oil price?

Alan McKim

Yes, our fuel purchase is about $20 million on an annual basis, right now. And as you can imagine, a big percentage of that has been diesel, and even as gas trended down in the summer time here. Our diesel prices have continuously sky rocketed, and it really were at an all time high this morning. Crude will continually have a big impact, obviously on that, and now on gasoline as well. We run a large fleet of trucks, gas trucks and things.

So, we think just overall fuel is going continuously to be an impact on our business. We have been pushing our fuel surcharges to try to offset that. And customers have been very receptive and understanding about that, many of them in turn charge fuel surcharges. We still have a very large outsourced transportation fleet. And we have got a number of key partners in the transportation side of our business that are passing on fuel surcharges to us in that area.

That's one of the reasons why I think our cost reductions and transportation haven't been as successful, because their fuel surcharges have been going up consistently over the last couple years. So, it's something that we really managing very closely and we got a good handle on them.

Arnie Ursaner - CJS Securities

Thank you very much.

Alan McKim

Okay.

Operator

Our next question will come from Vito Menza with Sandler Capital.

Vito Menza - Sandler Capital

Hey Alan, hey Jim, really great quarter, I mean the numbers speak for themselves, especially that incremental margin you showed. Just bookkeeping question, Jim, what was cash flow from operations this quarter?

Jim Rutledge

Yeah, the cash flow from operations, I want to say roughly, let me just get the right number for you here. So, from operations that you will see on the -- for the quarter that you'll see as part of our cash flow statement in the Q is $34.5 million. We're finishing that up right. So, it was a nice quarter from cash flow from operations.

Vito Menza - Sandler Capital

Great, [strong all around] guys congratulations. Great, great quarter.

Jim Rutledge

Thank you.

Alan McKim

Thank you.

Operator

We have a follow-up question from Rich Wesolowski with Sidoti.

Rich Wesolowski - Sidoti & Co.

Hi, thanks a lot. Can you discuss what factored into the decision of maybe review, you mentioned earlier on the call, I didn't catch it. Decision on El Dorado, why you are investing in the recycling capabilities, I was under the impression that that was one of the lower value added services that bring in the incineration portfolio?

Alan McKim

Really, between infrastructure they have, what's also exciting about that site is, we have a waste to energy boiler at that facility where we offer our customer recycling credits for handling the solvent streams and generate steam. So, we have a tremendous amount of surplus steam, we have a major wastewater treatment facility, we have rail at that site and we have a tremendous organization down there.

And I think now after acquiring that after a year, we want to continually make investments in that location. We've hundreds of acres of site there that we can expand and it's in a great location.

Rich Wesolowski - Sidoti & Co.

How much of the Site Service growth that you have, say this quarter, last quarter, so far in '07 is based on units that have been opened during the last 18 months versus stay like a same store sales from your Heritage northeast operations?

Alan McKim

It will be a guess, and I think, Rich, at this point on the call here at least I know we have that data, I know Dave Parry and Gene Cookson track that. As you would expect when you have the number of branches we have, you have some of the same stores that are doing quite well and others that might have a slow period, if you would.

But the nice thing about it is with the number of branches that we now have, we can shift resources from one location to another. So, we can continuously keep that utilization up high and support any real bubbles of growth that might be out there. But the new offices are doing well for us and we are optimistic that we can keep opening up additional branches.

Rich Wesolowski - Sidoti & Co.

Okay. Finally, could you just confirm your intention to payoff the $90 million and 11% plus debt in '08?

Alan McKim

That is the intention, Rich, absolutely.

Rich Wesolowski - Sidoti & Co.

Great, thanks a lot.

Alan McKim

Thanks.

Jim Rutledge

Thank you.

Operator

Our final question will come from Mark Grzymski with RBC Capital Markets.

Mark Grzymski - RBC Capital Markets

Hi again.

Alan McKim

Hi

Mark Grzymski - RBC Capital Markets

Alan, the $50 million, excuse me the $50,000 in additional capacity, there is no correlation between that and the fact that you said the five incinerators that potentially are coming off-line, the captives that equates about 50K?

Alan McKim

No, actually the capacity increases that I mentioned were really bottoms up detailed approach to maximize the throughput of our facilities. And so, the 50,000 tons that I mentioned that could come out of the captive market is somewhat of an estimate for the call here, but I think it's pretty good one.

Mark Grzymski - RBC Capital Markets

Okay. And then just lastly acquisitions. You've got a great balance sheet. You are paying down the $90 million, it’s even going to get stronger. And there are plenty of areas to grow, what are you targeting right now from an acquisition standpoint?

Alan McKim

We continuously look at opportunities to help us either expand geographically or to add more disposal capabilities, to expand our Site Services business in a larger or more meaningful way than opening up some of the new offices that we are doing sort of on a one off basis. And I think that we are trying to be selective, we've looked at a lot of opportunities out there and passed quite a few of them frankly.

And we want to be prudent. We are excited about paying off that high yield debt, getting that behind us. And maybe, relevering the balance sheet to take advantage of some growth opportunities through acquisition next year. So, I think we're good, and as you said, we are well positioned for that.

Mark Grzymski - RBC Capital Markets

Okay. But would you expect something in the next 12 months from an acquisition standpoint. Do you think there's enough out there or some thing may pop up?

Jim Rutledge

I don't say expect would probably be the right word, but we will continuously pursue that. I think we are good at it. If we can find some partners out there, where we could gain some management and leverage our infrastructure here, our systems, our plants, it would be wonderful. Romic is a nice little deal for us and there are other opportunities like that out there. But I wouldn't set any high expectation. We are going to continuously look at it prudently.

Mark Grzymski - RBC Capital Markets

Great. Thanks, guys.

Alan McKim

Okay.

Operator

At this time, we have reached the end of the questions and answers. I will now turn the conference back over to Mr. Alan McKim for any additional or closing remarks.

Alan McKim

Okay. Well, thanks very much for joining us today and for your questions. We look forward to talking with you at the end of our fourth quarter. And share with you not only full-year, but also talk about our guidance for 2008. Thanks, again.

Operator

That does conclude our call. We would like to thank everyone for their participation. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Clean Harbors Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts